Nick Goodway: Bad bank that’s not so good for us taxpayers

If only I had managed to dodge the bullet when I was asked to cover the banking sector back in September 2007.

Until then, my life had been a gentle round of telecoms, media and the odd technology company. The latest mobile phone, the next ITV blockbuster and people who kept talking about convergence.

Instead, I found myself plunged into the world of subprime loans, credit default swaps, fat-cat bonuses and capital tier one ratios. It’s not been a quiet half dozen years but it’s not been boring. However, even now I come across oddities, and one of the most odd is UK Asset Resolution. In the topsy-turvy world of banking, this is one that even Lewis Carroll might have found hard to put Through the Looking Glass.

UKAR is the country’s “bad bank”. It is the rump of the worst mortgages from Northern Rock and Bradford & Bingley, which we the taxpayers own 100%. As its aptly named chief executive Richard Banks puts it: “It’s a very strange world I live in now.”

He points out that he is perhaps the only banker in the country who, when he rings a customer, cannot sell them anything. He is the only banker who looks forward to his bank’s profits continually dwindling as he and his team of 2400 seek to recover as much as they can of their 615,000 customers’ total of £66 billion of mortages. If he succeeds, and he will, the taxpayers’ loans to the “bad bank”, which are now down to £43.4 billion, will be repaid in their entirety. Indeed, the taxpayer could end up making a profit. That is something which currently looks far less likely at Royal Bank of Scotland or Lloyds Banking Group.

But, of course, we have to ask what is a profit in this case? The answer, sadly, is that it is whatever the Treasury (which holds the 100% stake on our behalf) decides it should be.

One way in which it does this is to tweak the rate of interest it charges UKAR for those taxpayer loans. Peversely, the stronger and safer the “bad bank” gets the higher the Treasury decides it should be charged. So from May 2012, the interest charged on the Northern Rock part of the debt, which is £22.8 billion, was raised to 1% above base rate from 0.25%.

Similarly, the £7 billion of loans described as the working capital facility part of B&B’s total loans of £27 billion saw their rate hiked from base rate plus 1.5% to plus 5%. That interest rate of 5.5% is the kind of charge you might expect on a personal loan from the more competitive High Street banks. It does not seem to be fair on a state-owned lender.

It is hardly the kind of charge one would expect a sovereign lender to be levying on loans that are pretty much guaranteed by bricks and mortar — more than 90% are being paid for through perfectly sound mortgages.

When you think that this sovereign lender, once it becomes a sovereign borrower, can raise 10-year money at just 1.8% and shorter money at considerably less, should we the taxpayer really being paying it interest at more than three times that level?